Accountability boils down to beneficiaries

Marta Rey- Garcia

I found the recent conversation on foundation accountability between Buzz Schmidt and Rob Reich both timely and fascinating. It reached far beyond the usual debate on the to whom and the hows of accountability rituals. Instead, it dealt with the very essence of being a philanthropic institution (PI) and with the sources of its legitimacy in the eyes of society.

Schmidt’s criticism on these ‘unaccountable perpetuities’ passionately echoed enlightened European philosophers in the late 18th and early 19th centuries, who not only questioned the altruistic intentions of church and secular founders and the actual benefits PIs produced for society, but also referred to the ‘obsolescence’ of founders’ intent in the face of evolving social needs. Not by chance, PIs were called ‘mortmain’ (‘dead hands’) and were fiercely attacked at the time in several countries of continental Europe.

Many things have changed since:

  • Philanthropy is a consolidated institution in all developed countries.
  • PIs and their donors usually enjoy tax breaks.
  • A whole industry has emerged around them – investing, accounting and legal services.
  • Many countries require PIs to spend a minimum payout in public benefit purposes.

In this context, I would argue that perpetuity is neither the focus of criticism nor the driving maxim for European foundations anymore. On the one hand, consultancy firms have been advising donors on the advantages of creating spend-down or limited-life foundations, such as Chuck Feeney’s Atlantic Philanthropies. Time-value-of-money arithmetic quickly shows that foundations’ warehoused assets become less valuable every day in the face of inflation and rampant social needs. On the other hand, as Reich rightly points out, a longer time horizon in foundations’ decision-making is in itself valuable, if backed with a clear mission and enough resources to allow for some risk- taking and for the patience required for social change to take place.

The pivotal accountability issue rather lies in the structural flaws of PI governance. A foundation is an asset-based non-profit organization designed for the long-term, governed by trustees. Neither members nor owners control them and founders are not perpetual. The stronger incentive is for both trustees and the supporting industry to use the foundation to perpetuate themselves, rather than to accomplish its social-benefit mission by maximizing the value delivered to society. Actual supervision of foundations, however, tends to focus on the board’s duty of care – overall economic performance and specifically asset preservation – and rarely on its duty of loyalty – guaranteeing compliance with the founder’s intent and with the foundation’s public-benefit mission.

The keystone for transformational debate lies in questioning whether tax-favouring PIs in developed countries in the 21st century, without adequate external accountability systems in place, makes any sense at all for society. Continuance and intensity of tax benefits should be contingent on compliance with a system of material accountability to taxpayers and beneficiaries – the simpler the better – combining transparent disclosures on PIs’ programmes with useful impact evaluation – to learn who is better off, and how, because of the programmes. Accountability boils down to beneficiaries. It is the responsibility of PIs to demonstrate that results from their private agendas for the public good deserve the generosity of citizens.

Prof. Dra. Marta Rey-Garcia, Associate Professor of the University of A Coruña

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